Taiwanese Makers at a 3G Crossroad
In Taiwan, GSM/GPRS handsets account for 90% of shipment volume while CDMA handsets comprise a meager 4%. Unlike in Taiwan, CDMA handsets have always been Korea makers' forte. Therefore, Qualcomm's strategic move to introduce CDMA technology and chipsets to Taiwan are driven by various factors. The company is trying to pre-empt attempts by TI and STM in the CDMA/CDMA2000 1x chip market and lower the risk of its high concentration of customers such as Motorola, Samsung, and LG. More importantly, Qualcomm is aiming to forge an Asian Pacific CDMA2000 and WCDMA competitive front through Japanese, Korean, Chinese, and Taiwanese players.
Given that Taiwanese makers primarily undertake orders for GSM/GPRS handsets, while these air interfaces have already become the global mainstream Taiwanese players have fallen behind Japanese and Korean makers in WCDMA design by about two to three years. In Western Europe, operators like Vodafone, T-mobile, and Orange will also be rolling out WCDMA services this year. Therefore, Nokia, Motorola, Sony Ericsson, and Japanese and Korean brand-name vendors are all aggressively gearing up for the initial development of 3G.
It will take some time before WCDMA technology finally gets off ground and even longer for major vendors to outsource handset production. Major vendors are also eager to release orders of GPRS handsets. Taiwanese makers pursuing ODM models will face a dilemma as to whether to develop GPRS or WCDMA. For branded makers, jumping into WCDMA early on may prove beneficial for either building up brand recognition or gaining familiarity in cooperative models with operators.
Qualcomm's Pacific Rim Alliance
US and European vendors all have their various designs on the business opportunities presented by 3G. However, with the dice still rolling for 3G competition, Qualcomm, whose customer portfolio is heavily dominated by Motorola and Korean makers, will at this point find it difficult to secure growth through another maker. On the other hand, seeing that there are numerous solution providers for GSM/GPRS handsets, emerging handset industry clusters in the Pacific Rim offer Qualcomm more chances for developing a customer base:
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Qualcomm maintains a simultaneously cooperative and competitive connection with Samsung, and cooperates with other second-tier Korean CDMA vendors such as LG, Telson, and Sewon. As these makers have also already moved into GSM/GPRS, Samsung will lead the way in allowing Qualcomm to push forward with global expansion through Korean players.
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In China, Huawei and ZTE, which have strong design capabilities in base stations and handsets, have cooperative links with Qualcomm. Other handset makers assemble 90% of their phones from CDMA kits from Korea and GSM/GPRS kits from Taiwan, and focus on feeding domestic demand. However, major Chinese makers such as TCL and Haier are working to strengthen their design competencies, in-house production capabilities, and in the long term, expand overseas.
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As leaders in WCDMA development Japanese players predominantly employ business models emphasizing a high degree of vertical integration, which serves as the chief source of their core competence. However, some Japanese mobile phone makers not yet backwardly integrated have had difficulty seeking out solutions providers. These players have thus turned directly to chip suppliers.
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In Taiwan, where WCDMA and CDMA2000 is still just getting off the ground, makers have only obtained piecemeal CDMA licensing from Qualcomm, and CDMA only accounts for 4% of shipment volume. Nevertheless, Taiwan's GSM/GPRS handsets have reached 10% of global shipment volume, indicating that the Taiwanese mobile phone solutions market cannot be overlooked. |
Qualcomm's Underlying Motives
By entering a cross-license agreement with TI in GSM/GPRS technology, Qualcomm has taken concrete measures in line with the global development toward multi-mode. This also serves as an opportunity for Qualcomm to expand into the GSM/GPRS segment, where it does not have broad base. However, more importantly, from the perspective of emerging makers in the Pacific Rim, Qualcomm and its unique CDMA/CDMA2000 is a brand new technology requiring the establishment of wholly-new cooperative ties. Therefore, Qualcomm may find it difficult to seek new customers.
According to Qualcomm's product roadmap, the company is planning to roll out more 6225 chipsets in the second half of 2004 as part of its UMTS WCDMA value-line 62xx series. Additionally the company is expanding directly into the high-end segment with the fourth quarter release of the 6275 chipset, as well as 7000 series chipsets in the future. For CDMA2000, Qualcomm's new line is highly fleshed out, and is particularly heavy on high-end multimedia chipsets, and even a single-chip dual-processor 7000 series are expected in the future. Qualcomm's product strategies demonstrate its attempt to bypass direct competition with TI and second-tier suppliers in the WCDMA segment. Rather, the strategies are intended for Pacific Rim players, which comprise target customers of two different segments: high-end customers in Japan and Korea, and value-line customers in China and Taiwan. Using WCDMA as a stepping-stone, Qualcomm aims to initiate dialog with customers, understand their needs and finally build up connections. While the effort will help Qualcomm broaden its WCDMA customer base, it will also set the stage for the expansion of Qualcomm's specialty: CDMA2000.
Cooperative Models and Price Determine Competitiveness
Qualcomm generates 26% of total revenues by licensing CDMA technology, rendering licensing a core part of the company's profitability. Qualcomm is hence intrinsically different from other platform solution providers -- semiconductor makers that have generated the bulk of revenue from R&D and production, such as TI. This explains why Qualcomm has taken a tough stance in licensing negotiations. High product costs, incurred from high licensing fees could drive interested players away.
As new entrants in the Pacific Rim are smaller in scale and hold fewer resources, Qualcomm's licensing fees and models, design support, and chip pricing will determine the point in time at which handset makers adopt these technologies. Solution providers in the region have long cultivated their relationships with customers and helped them ramp up mass production. These long-standing service models present challenges to Qualcomm's strategic intentions, and present Pacific Rim makers with the difficult choice of assessing the risks of choosing where to invest resources.